Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Kirby
Corporation (KEX) at 'BBB'. In addition, Fitch has affirmed the senior
unsecured revolving credit facility and senior unsecured notes at 'BBB'.
The Rating Outlook is Stable. Approximately $780 million of outstanding
debt is covered by these ratings. A full rating list follows at the end
of this release.
KEY RATING DRIVERS
The ratings are supported by the company's strong free cash flow (FCF),
low leverage for the rating category, adequate financial flexibility,
and strong market share in the marine transportation segment. Ratings
also incorporate Fitch's expectation that Kirby will use FCF for capital
deployment actions including acquisitions, capital expenditures, and
share repurchases.
Kirby's credit profile benefits from considerable market share in the
inland tank barge market, as the company operates approximately 23% of
the industry's current capacity. The company has historically maintained
significant FCF margins, typically in the high single-digits, though
periodically depressed due to capex related to fleet deliveries. In
addition, KEX's high EBITDA margins, north of 27% in 2015, and
successful capacity management within the inland marine market, has
allowed the firm to maintain financial flexibility and adequately
mitigate the impact of cyclicality in the energy markets.
Fitch expects continued strategic acquisitions, largely funded through
debt given current liquidity levels. Offsetting the risks of on-going
acquisitions is KEX's track record of using FCF to repay
acquisition-related debt and utilizing equity as part of the
consideration offered in larger transactions.
Ratings concerns include the company's recent shift to
shareholder-friendly cash deployment strategies. In 2015, the company
repurchased $241 million of shares. KEX has authorization to repurchase
an additional 1.4 million shares as of December 2015. Fitch is also
concerned with the firm's limited cash balance and consistent use of its
revolver. Additional concerns include a potentially large debt-funded
acquisition or margin erosion due to pricing pressure in the inland
marine transportation market.
Pricing power has remained relatively strong in the inland tank barge
market through 2015 as most of the rate reductions have come in the form
of lower fuel surcharges. Fitch expects further rate declines in 2016
despite industry-wide capacity utilization rates at roughly 90%.
Approximately 80% of the company's marine transport business is under
term contract, typically one year in duration, though these contracts
are increasingly being rolled over in a soft spot rate market. Fitch
notes that 47% of KEX's marine transportation revenue actually comes
from servicing the petrochemical market and this proportion has been
steady for several years. In 2015, only 30% of marine transportation
revenue came from Black Oil deliveries, which includes among other
products, crude oil, asphalt, coker feedstock and bunker fuel. An
additional 20% of marine transportation revenue was generated from
refined petroleum product deliveries in 2015.
Fitch expects capex to be approximately $240 million in 2016, down
considerably from the $343 million deployed in 2015, which was higher
than anticipated due to progress payments on KEX's new coastal units
that were incurred in December, 2015, one month earlier than
anticipated. Fitch views the firm's frequent asset purchases as
interchangeable with its regular capex. Fitch expects KEX to continue
regular fleet asset purchases to maintain the size and quality of the
firm's fleet such as its recent $88 million purchase of assets from
Seacor in March, 2016. Fitch expects KEX's FCF generation to remain
strong and likely north of $150 million in 2016 driven by high operating
margins and the lack of a dividend.
Kirby's adjusted leverage (total adjusted debt/EBITDAR) at Dec. 31, 2015
was 2.8x, compared to 2.5x at year-end 2014. Kirby typically maintains
adjusted leverage in the 3.5x-2.5x range. Kirby incurs a lease expense
for certain rented facilities, equipment, and towboats, which have
charters that include crew costs, thereby inflating the company's rent
expense. Fitch multiplies annual rent expense by 8x for its total
adjusted debt amount.
KEY ASSUMPTIONS
--Significant revenue decline in 2016 driven by lower charter rates;
--EBITDA margins of approximately 25% over the medium term;
--Capex remains at roughly 13% of revenue annually;
--Lack of a common dividend over the medium term.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively,
lead to a positive rating action include:
--Adjusted leverage (total adjusted debt/EBITDAR) below 2.5x for a
sustained period;
--FCF margins above 10% for a sustained period.
Negative: Future developments that may, individually, or collectively,
lead to a negative rating action include:
--A significant debt-funded acquisition;
--A significant increase in leverage to fund a large share buyback or
special dividend;
--Adjusted leverage (total adjusted debt/EBITDAR) above 3.5x for a
sustained period.
LIQUIDITY
As of Dec. 31, 2015, Kirby's total liquidity was $272 million composed
of $6 million in cash on hand and $266 million in available funds under
its revolver. The cash on hand, although fairly small, is in line with
historical amounts as the company typically prefers to keep a small
amount of cash on its balance sheet. In addition to its cash on hand,
Kirby maintains liquidity through a $550 million unsecured revolver that
expires in April 2020. As of Dec. 31, 2015, there was $279 million
outstanding under the facility as well as $5 million in letters of
credit. The borrowings under the revolver were used to finance capital
expenditures, share repurchases, and to refinance the prior credit
facility.
FULL LIST OF RATING ACTIONS
Fitch affirms KEX's ratings as follows:
Kirby Corporation
--IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Financial statement
adjustments that depart materially from those contained in the published
financial statements of the relevant rated entity or obligor are
disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock
based compensation and non-reoccurring items;
--Fitch has adjusted the historical and projected debt by adding 8x
annual gross rent expense.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002827
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002827
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
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PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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